Friday, October 1, 2010

We are seeing lots of inflation trades today as the market pounds the currency while it awaits a potential QE from the Fed.

This was a disastrous week for bucky:

Quick Take:

Gold moved to a new record high and oil topped $81 a barrell as the dollar sold off hard.

Folks, the Fed is rapidly getting backed into the corner. It's as if the market is pulling a Dirty Harry and daring the Fed into pulling the QE lever:

Stocks are pretty flat on the day as the computers continue to trade with one another.

I would ignore stocks right now and focus more on the currency and bond markets. This is where the real action is. You can't really read into what the stock market is doing. It continues to trade erratically.

Wednesday, September 29, 2010

Folks, the market trades irrationally at times and now is clearly one of those moments.

It's almost as if there is an imaginary floor and ceiling in the markets. The news doesn't seem to matter anymore unless your name is David Tepper.

he whole week has been been one giant "nothingburger":

I sometimes wonder if there is a trading algorithm that signals "buy" and "sell" every time the S&P drops or rises 5 or 6 handles from where it closed the day before.

Watching the market is like watching tape dry at this point. The only thing that seems to consistently rise anymore is gold. The only thing consistently falling at this point is the dollar.

Huh!...OMG...Wait a second!...: I think we finally have a correlation here that makes sense: Lower dollar=Higher gold!

Hallelujah! There is a god! The market just made sense!

I hate to be so scarcastic here but what else can you really say at this point?

We have seen insanity like this before(I'm sorry about this Henry, I love the "tech ticker" but you were one of the tech bubble catalysts!)

My Take:

It's always nice to see old reminders of how irrational the market can get at times. The AOL/Time Warner merger ended up NOT being the most compelling media conglomerate. In fact, it ended up being an unmitigated disaster. AOL is a laughing stock at this point!

Two years following this interview the NASDAQ found itself 75% down from the highs.

I don't mean to throw Henry Blodget under the bus here. In fact, some of his tech plays like Amazon actually worked out. However, most of the winners still find themselves far below where they stood at their tech bubble highs.

I only bring this stuff up as a reminder of how bubbles work. They can mesmerize you and make you believe that they are real.

The Fed is trying to recreate this image as they keep interest rates at zero. This policy decision if forcing the market to create numerous financial "illusions".

The problem with "illusions" is that they are not real. They are temporary and the almost always end up leaving you in tears.

The zero rates policy has potentially created multiple bubbles this go around:

Gold.

Housing.

Bonds.

Equities.

Take your pick above folks. Any or all of these irrationally priced assets could pop at one point or another.

The way I see it, they could all come tumbling down OR one of them could cannibalize the other.

For example:

If interest rates rates rise then I see all four of these potential bubbles popping all at once. This means more expensive lending(bye bye housing and equities), a stronger dollar(bye bye gold), and a collapse in the values of treasuries(bye bye current bondholders).

If the Fed does a QE then gold will rise and bonds will follow at least for the short term. Housing and equities however may find themselves with fewer buyers as investors sense signs of desperation from the Fed and begin chasing bonds and gold out of fear..

If the economy turns around....Wait a second....Let me stop laughing so I can type...Ok..Thanks I'm back!

Let me start again: If the economy turns around then gold and bonds could collapse as investors regain their "animal spirits" and pile into equities. Heck, who knows, maybe a few would even buy a home or two under such a scenario.

When it comes to housing I honestly don't see any scenario where prices ever come back. I still call this a bubble because the Fed has taken such drastic actions to prop up housing prices.

The housing bubble only partially popped. We will have to wait a generation or so before this asset finds any buyers. People can scream bull**** on this reality all they want as they continue to hold onto their real estate dreams.

It's a virtual certainty at this point when you look at foreclosures, inventories, and current home sales.

Folks it's simple: If houses can't be sold at current prices with interest rates at 4% then they simply aren't gonna sell until the prices capitulate to a level where they find buyers.

The only areas that we have seen anything close to capitulation are in places like AZ and FL where prices dropped 80% in many areas. What's scary is there are very few buyers in these two areas at these levels despite the massive price drops.

We still haven't seen capitulation in the majority of the "bubble" markets in the Northeast but you can be assured that it's only a matter of time before we do.

The reason we haven't gotten there yet in many markets is because many houses in AZ and FL are "second" homes.

These homes are much easier to walk away from because they aren't primary residences. Also, the inventories in these two markets were also much larger due to excessive speculation in housing as the bubble inflated.

Think about it:

If you were a housing speculator in the early 2000's wouldn't you want to build in the most desired areas? That's exactly what happened. When bubbles pop they usually hit in the areas that saw the most speculation first.

The Bottom Line

I write this post as a warning to anyone that's getting infatuated with their bubbles.

It's easy to get caught up in them. They are fun for awhile because they make you lots of money in the beginning.

I am certainly not immune to them. I currently own two of them myself(gold and bonds). I own a few equities as well but it's a small part relative to my other holdings.

Despite all of the pain bubbles have caused me they are still fun to watch. I sit here in front of my computer screen quite often and watch gold go up and up and up and up. At times I find myself wanting to yell: "Wow, look at my gold go!".

Other times I want to give Bill Gross a huge hug as I watch my PTTRX bond fund rise on an almost daily basis.

When I find myself feeling like this I always try and take a step back in order to put things into perspective because I have seen these games before.

Earlier in my investing life my account was usually left in ruins soon after I felt such powerful emotions when it came to my investments.

I have come to accept the fact that these painful lessons will never end because the market is impossible to master. Stanley Druckenmiller would have never hung up the gloves if it was possible.

However, these "growing pains" have taught me to always stay diversified and take profits because pigs always get slaughtered when they become infatuated with bubbles.

Tuesday, September 28, 2010

Many investors are asking themselves this question these days. The market continues to trade in a very dislocated fashion. Today was a perfect example:

- Gold Higher.
- Bonds higher.
- Stocks higher.
- Dollar lower.

There are many questions to ask when you read this tape:

Why are bonds continuing to rally as the market has moved sharply higher over the last few weeks?

Why are stocks rallying as the economy continues to show signs of economic weakness?

Why are investors continuing to pile into bonds as the dollar moves sharply lower?

Inquiring minds would like to know!........

The more I look at this market the more I become convinced that it's been taken over by trading robots.

There is no such thing as investors anymore. Wall St's participants have decided they would rather "front run" rather than "invest".

The fundamentals seem to no longer matter. The individual investors have figured this out and have decided to bail into treasuries and other fixed income. Some of the questions I asked above are fundemental questions.

The problem today is the fundementals no longer matter. I used to think that in the end the fundemantals ALWAYS mattered. Today I hope this is still the case, but I must admit, I am starting to question if they really matter anymore.

I now often find myself asking myself these two questions:

Has the market has spiralled so far out of control that it cannot afford to let the fundementals matter?

Can this country fiscally afford to let the grandest Ponzi scheme ever seen in history to pop?

I keep looking for the "bond vigilantes" who have saved us from ourselves in the past by raising interest rates when government spending started to get out of control.

Sadly today, they are nowhere to be found.

Without the vigilantes I see no end to this mess. We obviously don't have the political courage to clean up this disaster ourselves because the pain is simply too great for anyone to handle.

As a result, the market continues to sit here and ask "Now what?".

We can't sit here like this forever of course. At some point something will give. Unfortunately, it appears that it's going to take a crisis before we take the necessary steps that are needed to fix this country.

I guess I shouldn't be surprised. It always takes a severe arm twisting before America ever fixes anything.

One thing continues to be clear as we sit here and wait: The economy is not improving and things appear to be getting much worse.

This was the largest drop in shipping tonnage since March of 2009 which is when the recent rally started. This is a key economic indicator that should not be ignored.

The Bottom Line

Our financial "car" continues to sit here in neutral as we figure out the end game to this financial crisis.

Because we continue to sit here on our hands and do nothing I am leaning towards an inflationary end to crisis. It appears that we will go down kicking and screaming like a child in the middle of a temper tantrum when the end game finally arrives.

It will end this way because there is no leadership in Washington that's willing to step forward and do the dirty work.

This lack of leadership that's been seen in response to the second leg of our depression assures you that the US will let the crisis dictate the ending instead of us.

This "lack of action" will likely lead to inflation or even hyperinflation because our currency will depreciate as we continue to spend more and more money that we don't have.

If we were willing to accept our medicine, take the losses that have been hidden by the Fed, and hold oursleves accountable then things would likely turn out differently.

I see no signs that we are heading in this direction. The Fed will continue destroying our currency as we continue to play "hide the sausuge" via various bailouts and Quantitative Easing.

If you listen to Meredith below, it appears the next trillion dollar bailout will be spent on the states:

As usual Meredith hits another homerun. The bailouts never seem to end and our dollar will continue to reflect this.

Monday, September 27, 2010

Before I start this piece let me acknoledge all of the Prechter haters that I hear from everytime I bring him up.

He was back in the news after doing this CNBC interview today:

My Take:

I found it amusing that the DOW sold off as Prechter was preaching his doom and gloom only one day after hedge fund giant David Tepper's comments triggered a 200 point rally.

Like all analysts, Prechter has gotten things wrong at times just like everyone has at one time or another. This doesn't mean that his comments should not be taken without merit.

In fact, I will take Prechter over any economist out there becasue I can't name an one besides David Rosenberg that has gotten anything right in the last few years.

Now, let me get this straight, do I think the DOW is going to hit 1000, 2000, or 3000? I have no idea. If it does I hope you have some canned goods and gold in the basement because this country will not be able to function properly after a 90% correction.

What I do know is Dr. Prechter made some excellent points during his analysis which is all I ever care about.

I couldn't agree more with him when it comes to the high yield bond market. Folks, they are called junk bonds for a reason. The fact that the market can't buy enough of stuff that's most likely worth zero without mark to market accounting standards is frightening to say the least.

I feel like I am watching a group of sheep being led to slaughter as I watch stock brokers continue to pile their clients into this toxic debt.

I thought Prechter's information around fund managers sitting in only 3% cash(which is the lowest levels since the crash) was also very telling.

Here is the first question that comes to my mind after hearing this:

How is the market going to move higher if the fund managers are 97% "all in" at this point?

The DOW has gone NOWHERE in about a year. Is this the best they can do while sitting in only 3% cash? To be fair I am sure they have significant positions in bonds after their huge run.

I would love to know what % of bonds these funds hold.

Prechter is basically calling for a classic delfationary death spiral. The dollar soars and equities crash in such a scenario.

At this point this would be considered a classic contrarion view when you listen to the market participants.

Calling deflation the "contrarion view" first appears to make no sense when you see what happened to the 10 year today(as well as the whole year):

Both camps can make their case when you look at the markets. The hyperinflationists scream "look at $1300 gold!" while the deflationists Rspond by screaming " look at bonds!".

Too see such market dislocations is really unprecedented. Talk about mixed signals.

Nonetheless, the hyperinflationists seem to be in the lead for now because the Fed looks to be heading straight towards the QEII path.

"Rather than announcing massive bond purchases with a finite end, as they did in 2009 to shock the U.S. financial system back to life, Fed officials are weighing a more open-ended, smaller-scale program that they could adjust as the recovery unfolds.

The Fed hasn't yet decided to step up its bond purchases, let alone agree on an approach. After its last meeting, the Fed's policy committee said it was "prepared" to take new steps if needed. A call on whether to buy more bonds depends on incoming data about economic growth and inflation; if the economy picks up steam, officials might decide no action is needed

A leading public proponent of a baby-step approach, James Bullard, a 20-year Fed veteran who has been president of the St. Louis Federal Reserve Bank since 2008, says he has made progress convincing his colleagues to seriously consider that approach. "The shock-and-awe approach is rarely the optimal way to conduct monetary policy," he says. "I really do not think it is the right way to go except in really exceptional circumstances."

Under a small-scale approach, Mr. Bullard says, the Fed might announce some target for bond buying, say $100 billion or less per month. It would then make a judgment at each meeting whether continued action was needed, he says, based on whether "we're making progress toward our mandate of maximum sustainable employment and inflation at our implicit inflation target."The Bottom Line:

So does the "deflationist" Robert Prechter have it right or will the inflationists be proven right as we watch the dollar crash as the Fed caves into the pressure of Wall St's QE2 demands?

The question remains unanswered in my view. Who knows, maybe they will both be right and we see a little of both when it's all said and done.

For now, today's article in the WSJ suggests that the Fed might be backtraking from their FOMC statement last week. I had suggested on Friday that they might have painted themselves into a corner with their statement. The last thing they want to do is to lead the market into thinking "don't worry, we got your back".

There is enough specualtion in the market as it is. This has resulted in a total lack of confidence by most investors who have responded by getting out of the game.

Tonight's article tells me that maybe they are realizing that they might have gotten ahead of themselves with all of their QE2 talk.

Althought I am against any QE, Bullard's arguement makes the most sense if they are going to pull the trigger.

There is nothing wrong with testing the waters. You don't need to jump all in at once whenever a crisis arises. We have repeatedly done this during our crisis. This often leads to catastrophic mistakes. TARP anyone?

One thing is for sure, the market really doesn't know what do believe and they are hedging their bets by owning both gold and bonds in order to protect themselves from either scenario.

Cazenove technical strategist Robin Griffith shouldn't expect to be invited to any of the Wall Street cocktail parties anytime soon after his comments on Europe's version of Squawk Box.

Griffith made a very compelling argument as to why we have seen such an aggressive rally in equities in September. Mr. Griffith explains that the Fed intervened into the market this month by using it's POMO operations to buy treasuries off of the banks.

This nice new pile of cash allowed the banks to pile a bunch of dollars into stocks. This bullish price action then triggers buying from the trading algos as they see prices rising.
This is Ponzi finance at it's finest folks. If you click on the POMO link above you will see that the Fed made 9 POMO purchases in the month of September.

This gave the banks a nice wad of money to blow on the equities market. Expect more volatility in coming weeks as more games are played. With the trading volumes so light it's very easy to "goose" the market as Griffith calls it.

Also note that you are now up 30% if you got into bonds at the beginning of the year. That's quite a return when you compare it to the measly 4% the S&P is up during the same period.

It's always nice to hear the truth every now and then from one of the pigmen. It's a rare occasion, but if you look hard enough you can usually find one or two.

FYI,

Market looks very defensive again today. Bonds up/stocks down. Enjoy the roller coaster. I don't see it ending anytime soon.

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Disclaimer: The above is a matter of opinion and is not intended as investment advice. Information and analysis above are derived from sources and utilizing methods believed reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Do your own due diligence.